The Hot New 'Conservative' Jobs Plan Is Missing The Most Fundamental Element

Staff
members walk past the US Capitol dome ahead of President Barack
Obama's first address to a joint session of congress, in
Washington, February 24, 2009.REUTERS/Jonathan Ernst

Michael Strain of the American Enterprise Institute has been
pushing his fellow conservatives to advance a constructive
job-creation agenda, and many of
the ideas he favors are good:

Offering relocation vouchers to the long-term unemployed in
high-unemployment areas; allowing firms to hire the long-term
unemployed at less than the current minimum wage and
supplementing their income with an EITC-like payment; reforming
our disability insurance program so that it doesn’t serve as a
permanent exit from the labor market; publicizing and encouraging
worksharing as an alternative to layoffs; getting the government
off the backs of entrepreneurs; reducing occupational licensing
requirements; encouraging domestic energy production; providing
lump-sum bonus payments to unemployed workers who find a job; and
more.

Most of these ideas are good, though I'm wary of weakening the
minimum wage since the evidence that it significantly drives
unemployment at current levels is weak. But the most important problem with
Strain's plan is that it omits the key component that makes
Democratic economic plans more serious than Republican ones: An
approach to macroeconomic stabilization.

When the economy enters a recession, businesses stop
investing, they lay off workers, unemployment goes up,
individuals stop consuming because they lost or fear losing a
job, businesses cut back further due to weak demand, and misery
ensues. To break this cycle, you need macro-level policy that
stimulates demand and investment, preventing unemployment from
rising too high.

Liberals are big on macro-level intervention. Their main
favored approach is fiscal stimulus: having the government run
large budget deficits to generate demand that the private sector
won't. They are also much more likely than conservatives to favor
interventions through the housing market, such as wholesale
mortgage modifications.

As Ramesh Ponnuru
points out, conservatives need their own macro stabilization
approach. He favors (as do I) a monetary policy that adjusts
inflation upward when real economic growth falters. This would
make it easier for the labor market to adjust to declines in
productivity and help de-leverage homeowners at a time when home
pries are likely to fall. The effect would be to tame rises in
unemployment and declines in GDP.

If conservatives don't support and implement an effective
macro stabilization policy, misery will ensue (as it has since
2008) and voters will demand direct government interventions to
offset that misery, such as more generous entitlement
programs.

Now, some conservatives think macroeconomic stabilization
is impossible. This is the view of the Paulites and anyone else
who takes Austrian economics seriously. If that's so, they need
to say so—and they need to recognize that, in an economy where
you can't prevent spells of severe unemployment, a generous
welfare state becomes more morally necessary.

I happen to know from Twitter that Strain is more or less
in the Ponnuru camp on monetary policy. So why isn't he flagging
a more aggressive monetary policy as the lead, most-important
component of his conservative jobs plan?

Strain's plan could be a credible, conservative blueprint to make
the labor market more resilient to downturns and get more people
back into work. But it needs a monetary policy as its keystone.